Weekly Energy Market Update 23 September 2019

Gas

Gas prices saw high levels of volatility last week as the market digested the three unexpected ‘black swan’ developments of the previous week, which had triggered significant price spikes. An attack on oil facilities in Saudi Arabia led to a further price rise, as over 5% of global oil supply was shut down. The October gas contract hit highs of 40p/th, with the Winter 19 market at two-month highs of 52p/th. However, some of the uncertainty surrounding supply and demand was tempered, prompting prices to reverse some of those gains. EDF reported just 6 of its nuclear reactors are affected by welding issues, believing power stations do not need to close.

Russian gas flows via the OPAL pipeline, saw little change, despite the tighter restrictions. Furthermore, Saudi Arabia vowed to return its oil output to normal levels by the end of the month, quicker than initially feared. Short-term supply-demand fundamentals are also weighing heavily on the front of the gas curve, with October prices dropping to 32p/th. The Langeled gas pipeline is to return from maintenance tomorrow, boosting Norwegian flows to the UK.

Meanwhile, LNG sendout is expected to remain strong next month as the UK confirms three tankers already booked for October. Above seasonal-normal temperatures are also forecast for the next two weeks, slowing the typical rise in heating demand ahead of the winter season. While winter supply risks have been somewhat tempered, contracts from Winter 19 onwards remain elevated amid uncertainty over French nuclear power, Russian imports and tensions in the Middle East which are supporting oil prices. As a result, seasonal gas contracts are holding in the middle of their summer range, between their July highs and September lows.

Power

Power prices mirrored movements in the gas market, with short-term contracts falling sharply across the week. The rest of the electricity curve remained elevated. Short-term contracts were highly volatile following three black swan developments. An additional oil attack in Saudi Arabia provided further price support as prices moved to fresh highs early last week.

Seasonal power contracts hit six-week highs. Prices eased after EDF reported only six reactors are affected by welding issues and indicated no power stations need to close. However, the outcome of an investigation by the regulator ASN is still unknown and that body will have the final say on plant closures. Oil prices corrected quickly as Saudi Arabia promised a return to full production by the end of the month.

Short-term power prices fell further, in line with declining gas contracts, which were weakened by the current healthy supply-demand fundamentals. Day-ahead gas prices fell 22% with front-month prices down 13%. The equivalent power contracts also moved lower on the weaker gas costs, but overall declines were more gradual across the week. Longer-dated electricity contracts were marginally higher week-on-week, despite giving back some of their early gains. Prices are still underpinned by elevated carbon costs, with the price of allowances remaining above €25/tCO2e. Seasonal contracts are holding in the middle of their summer range, above the early September lows, and below the peaks from July.

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